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Jan 17, 2007

POLITICAL PULSE VII

PART I.   THE PLACE OF NON-FRENCH RESIDENT IN THE NEW OVERSEAS COLLECTIVITY STATUTE OF SAINT BARTHELEMY

 

A. THE TREATY PROTOCOL AND HOW IT IMPACTS AMERICANS

As we all know, the relationship between the United States and France (includes here and hereinafter Metropolitan France and its Departments, Collectivities and Territories) has had its ups and downs over history. During times of relative friendliness, the two Governments tend to cooperate more easily on matters of Treaty modifications and other matters relating to the treatment of the citizen of one country in the other host country.  2006 has marked the year of the greatest post 9-11 cooperation between France and the United States.

 

In 2006, The United States Congress, subsequent to the favorable opinion of President George Bush together with his encouragement and request of Congress to ratify the proposed Protocol, approved the Protocol signed between the two countries and called the “Protocol Amending the Convention Between the United States of America and The French Republic For the Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Estates, Inheritances and Gifts, Signed at Washington on November 4, 1978”.  The Protocol itself had been signed between the two countries in December 2004.

 

ARTICLE III, modifying Article 5 of the Convention, provides as follows:

 

(1) Real property may be taxed by a Contracting State if such property is situated in that State…

(2) The term "real property"…shall in any case include property accessory to real property…

(3) The term "real property" shall also include shares, participations and other rights in a company or legal person the assets of which consist, directly or through one or more other companies or legal entities, at least 50% of real property situated in one of the Contracting States or of rights pertaining to such property.  These shares, participations and other rights shall be deemed to be situated in the Contracting State in which the real property is situated.

 

What does this mean to the American looking for Paradise lost and seeking to purchase a villa, hotel or other business in Saint Barthelemy?

 

As to Death and Gifts:

 

The way we were - Pre-Protocol:

 

With a Pre- Protocol application analysis, pursuant to the 1978 Treaty, the shares of corporations holding residential or commercial real estate and related business activities, either directly, or indirectly in France, are deemed personal as opposed to real property and taxed in the country of residence of the shareholder (please note, not citizenship) for purposes of inheritance taxes and gifts.  In the event of death, the decedent’s estate is not subject to Ancillary Probate in France and the shares are distributed pursuant to either the specific gift provisions of the Last Will and Testament of the decedent, or in the alternative, pursuant to the personal property dispositions of the decedent's Last Will and Testament. There is no French inheritance tax paid, no French ancillary probate, and no reason to even care begin to understand the French inheritance tax system. Although Notaire’s fees are paid for the registration of the transfer of shares with the Recorder’s Office in Guadeloupe, to the beneficiary under the decedent’s Last Will and Testament, the same are quite nominal.

 

As to Gifts, Gifts in France are not taxable in France Pre-Protocol ratification.  Gift taxes are paid solely in the country of residence of the Giftor, pursuant to applicable laws in the country of residence.

Post Protoocol- The Way We Are

 

Pre-protocol ratification was quite comfortable in that it permitted non-French residents to concentrate largely on the implications of their death or gifts to spouses and children solely from the perspective of the incidence in their Country and/or State of residence.  Such is no longer the case. There is now the necessity of planning.

 

In application of the Protocol, the death of a person holding property in France subjects the beneficiary thereof to the imposition of taxes in France, whether the same is held outright OR through a corporate structure.  This used to only be true if property was held outright. There remain, depending on the particularities of the client and his or her situation, valid reasons for which to incorporate when purchasing in France, but those need to be reviewed at purchase.  The decision as to whether to incorporate or hold property outright must be made prior to purchase in order to avoid having to pay transfer taxes and notaire’s statutory fees, a second time for any post purchase transfer.  The transfer of any interest in real estate, directly or indirectly, subjects the transferee to the payment of transfer taxes and notaire’s statutory fees.

 

Despite the Protocol’s ratification there remains a very important implication of incorporation, which does not hold true when property is held outright.  That is the issue of children as forced heirs.  Although the shares of a corporation are subject to French Ancillary probate at this time, the dispositions relating as to who is a beneficiary under the decedent’s Last Will and Testament have not changed. In other word, it remains possible, when property is held through a corporation, to leave the entirety of the same to a spouse, to a single child or none among them, subject to the rules and laws relating to the same in the country or State of the decedent’s residence.

 

In the event property is held outright, the French laws relating to the children as heirs apply and the same may not be ignored, regardless of the disposition of the wishes of he decedent as set forth in his Last Will and Testament. Although the French law does not go so far as to render the Last Will and Testament null and void, the dispositions relating to the disposition of the asset held in France outright, if not in harmony with French Law, are invalid as to the French assets, where French Law will be applied.

 

I often explain to clients that at the time of purchase, it is important for them to define, short and long term, what it is they want to do with the property being purchased and to clearly explain their family situation.  The decision to purchase through a French or Foreign corporation, who the shareholders are to an SCI, SARL or other corporate structure, and the disclosures and other obligations must be reviewed at purchase so as to avoid surprises later.

 

As to shares of a corporation, gifts of the same are subject to taxation in France, regardless if the property is held outright in personal names without a corporate structure, or if the same are held through a corporation. In light of the applicable North American gift taxes, there is often little difference in the potential tax incidence in the event of a gift.

 

If we take into consideration the fact that any taxes paid in France, whether the result of a gift or inheritance, are in fact credited by the Internal Revenue Service against any taxes due in the United States (predicated upon the presentation of a proper Affidavit and supporting documentation), the consequences of paying taxes in France in the first instance may be inconsequential if the appropriate planning is undertaken at the time of purchase.

 

Regardless of the existence of Saint Barthelemy as an Overseas Collectivity of France and local laws and regulatory statutes, the future Collectivity of Saint Barthelemy will remain French, subject to the French Constitution, part of the European Union and subject to the International Treaties of France. The tax rate may change in Saint Barthelemy as opposed to France, but the rules will be those of France relating to the transfer, by death or by gift, of corporate shares or of property held outright, will remain subject to French laws and applicable International Treaties.

PART II.  THE OVERSEAS COLLECTIVITY OF SAINT BARTHELEMY

 

In October 2006, the French Senate approved the Statute for the island of Saint Barthelemy as an Overseas Collectivity, although the proposed statute was the subject of numerous amendments.  The road has been long- very, but it would appear that the final step is close- the approval by the National Assembly (equivalent to the United States Congress) of the Statute before presentation to the Constitutional Committee for a Constitutional review of the same.  It is currently expected that the approval by the National Assembly be as early as February 2007.  Although to date little of the anticipated calendar  has been in line with the reality, it is certainly hoped that this time line will be respected in order to avoid having to wait until the French Presidential elections and the potential political  result of  the elections and the view of perhaps unexpected “winners” vis-à-vis the Overseas Collectivity of Saint Barthelemy.

 

It must be reminded that the Statute’s purpose is not to provide a tax haven for non-residents and their investments, but rather to have clear legislation as to the tax obligations of residents and non-residents. To date, there has been no clear definition as to who exactly was to be protected and to whom the historical tax tolerance (no-payment of taxes) would extend such that the tolerance was globally afforded residents and non-residents alike, with certain punctual example made of both by the tax office as a reminder that taxes were in fact “due”.  In fact, legally, residents and non-residents alike have been subject to the laws, taxes and financial contributions of all French residents, with certain exceptions as to abatements and the non-payment of the value added tax applicable in Metropolitan France, among others.

 

Although there is much talk, speculation and guesswork as to what will happen to non-residents and the potential taxation relative to non-resident investments, it must be recalled that the island of Saint Barthelemy’s economy is based largely on the American investment and tourism.  Although it is perfectly normal to anticipate that non- Saint Barth’s residents holding property in Saint Barths, be they American or other, will be subject to certain taxes already paid  (inheritance taxes, capital gains taxes, etc) that may, under certain circumstances, be waived of true residents, the same will continue to be credited against any Stateside taxes due. I am informed that income taxes and real estate taxes, are not planned at this time.  Certain indirect taxes, which appear to be a preferred manner of imposition by the Collectivity of Saint Barthelemy, may be added or if already existing, increased.

 

A tax, which may be viewed as an income tax, will more than likely be due, which is a tax in the sum of 5% of the gross rentals received on the rental of weekly rentals.  A similar tax is not anticipated as to yearly rentals, I can only assume as a result of the shortage of affordable long-term housing available on island. A prior Article written by me and available in the editorial archives of this Website, explores the taxes that it is anticipated will be due by all.

 

In conclusion, the empowerment act referred to as the Statute for the Overseas Collectivity of Saint Barthelemy is close at hand and it is only after the positive approval of the same that local rules and regulations relating to matters of direct and indirect taxes, exemptions and other will start to be viewed, discussed, approved and ultimately implemented. Medium to long term non-resident investments can only be considered safe in my opinion in that it is these that sustain the local economy, foster luxury tourism and which permits Saint Barthelemy to retain it’s reputation of the most prestigious and sought after destination in the Caribbean.

Chantal Decombe-Greaux


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